Q4 2020 Intuitive Surgical Inc Earnings Call
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Ladies and gentlemen, thank you for your patience in holding and welcome to the intuitive fourth quarter of 2020 earnings release at this time all of your participant phone lines are in a listen only mode and the later there'll be an opportunity for your questions.
If you'd like to true up at any point during the presentation feel free to press one followed by zero. Just a brief reminder, today's conference is being recorded now happy to turn the conference over to head of Investor Relations Phillip Kim.
Good afternoon, and welcome to intuitive the fourth quarter earnings Conference call with me today, we have Gary <unk>, our CEO and Marshall Mohr, our Chief Financial Officer.
Before we begin I would like to inform you that comments mentioned on today's call may be deemed to contain forward looking statements actual results may differ materially from those expressed or implied as a result of certain risks or uncertainties. These risks and uncertainties of these are described in detail in our securities and Exchange Commission filings, including our most recent form 10.
10-K filed on February seven 2020, and form 10-Q filed on October 19 2020.
Our SEC filings can be found through our website or at the SEC's website investors are cautioned not to place undue reliance on such forward looking statements.
Please note that this conference call will be available for audio replay on our website at intuitive dot com on the latest events section under our Investor Relations page today's press release and supplementary financial data tables have been posted to our website.
Today's format will consist of providing you with highlights of our fourth quarter results as described in our press release announced earlier today, followed by a question and answer session. Gary will present, the quarter's business and operational highlights Marshall will provide a review of our financial results then I will discuss the procedure and clinical highlights and finally, we will host the question and answer session.
With that I will turn it over to Gary.
Yeah.
Thank you for joining us today.
Our fourth quarter capped the year in which the pandemic challenge to our customers and our business you had highlighted some core strengths for the company introduced some obstacles to overcome and triggered some changes for us.
To put the year on quarter in context, let me first review some of the numbers.
Procedures grew 6% year over year for the fourth quarter and 1% for the full year over 2019, resulting in approximately one in the quarter million procedures in 2020.
We placed 326 systems in the quarter down from 336 systems in Q4 of 2019.
For the full year, we placed 936 systems in 2020 down from 1119 systems in 2019.
Finally revenue fell 3% in 2020 as the result of delays in surgical procedures as hospitals focused on treating COVID-19 patients.
Digging a little deeper our core business remains healthy.
After the first surge of Covid of beta during this past summer our customers returned to returned to more routine use of our systems and solutions.
We believe that the intuitive ecosystem enabled increased access to and practice of high quality of minimally invasive surgery.
Which may of help hospitals conserve valuable intensive care resources during the pandemic.
Despite pressure on utilization of our systems due to Covid, our hospital customers continue to invest in building their intuitive robotics programs with additional systems.
Evidenced by a 7% increase in the clinical installed base in 2020.
We saw committed customers strengthening their programs likely due to their analysis of how well the intuitive ecosystem satisfied their quadruple aim of objectives better outcomes better care team experiences better patient experiences the lower total cost to treat per patient episode.
Lastly, we believe our investments in our analytics programs have helped customers routinely analyze their performance supporting their programmatic insights in the year.
Our confidence on our core business and our long term opportunity remains robust.
In spite of near term uncertainty, which is as follows.
First the pandemic is resurgent in many regions.
Now by more contagious variance.
Well the hospitals have better protocols to manage patients today than they did earlier in 2020, our weekly surgical data in December 2020, and continuing today chose another clampdown on surgeries.
Furthermore, we believe diagnostic procedures are slowing in hard hit regions with.
With diagnostic procedures running significantly below pre pandemic levels patients and hospitals will acutely feel the impact through disease progression and the more complex therapies necessary when patients do return for care.
This delay in diagnostic pipelines will likely take several quarters to resolve even after the threat of Covid begins to abate.
Second we know that future new capital installs are highly sensitive to utilization rates the.
The late surgeries will also impact the growth of surgical departments pressuring new system installs until excess capacity is consumed.
Third in countries, where the government pays of the health care Bill budget strain and economic fallout from Covid may impact health care spending and new and variable ways in different countries.
Lastly, the trend that started prior to the pandemic for increased data requirements and longer clearance timelines from regulators in the United States and Europe.
For our industry has continued this year.
Taken together these obstacles make predictions for the next several quarters difficult.
As I mentioned earlier 2020 as broadly illuminated some longer term trends in health care that validate our thesis.
The increased pressure on the health care systems to conserve acute care of resources for the sickest patients.
We have accelerated investments that enable patients to get the care they need with fast recovery.
Minimized minimizing consumption of scarce hospital resources and reducing complications the.
The compounding value of analyzing real time data and offline health care data to derive insights to drive better care has become obvious this year.
Lastly, we saw an acceleration of remote technology used to enable <unk> learning and analysis.
I've heard it said that in good times, we develop ourselves to become who we want to be while hard times reveal who we really are.
In the year, we set our priorities based on our values, we implemented community relief in customer relief launch of our extended use instruments program mobilized local and remote training resources to support customers differently.
And continue to listen carefully to our customers to best understand their needs.
We've seen positive customer response to this approach, which is reflected in our net promoter score.
You can find more information on these scores on our Jpmorgan Health care conference presentation from this month posted on our website.
Over the past several years, we've been building our capabilities in different countries to better serve their health care systems I'd.
I'd like to take a moment to take you through how we performed outside the United States in the year.
Turning first to Asia, our business in Japan is moving beyond urology, given reimbursements for a broad slate of procedures obtained in Japan in 2018 and 2020.
Government hospitals in Japan have been conserving resources for Covid care and the pandemic has introduced noticeable delays as the health care system reacts to outbreaks.
In Korea, our business continues to be dynamic with an innovation oriented customer group of adopting new products like our da Vinci SP.
In China, we saw accelerated customer acceptance of our partnership with Fosun pharma and our products with the growth in procedures in the business overall outpacing our pre pandemic plans.
In 2020, China emerged as our number two procedure market.
Turning to Europe, our team in Germany has had success in engaging larger German hospital groups with increased system placements broadening our market access.
Constraints on elective surgery have been implemented assertively in Germany in light of Covid.
In Germany, France, the UK, Italy, and the Nordics our goals have been to broaden da Vinci use beyond urology.
Progress there in has been hampered significantly by Covid Lastly, we see relatively low public sector of reimbursements in Europe for benign procedures.
Innovations from intuitive like da Vinci S and our extended use instruments are providing an option for more price sensitive customers in these markets.
With regard to our innovation and product engines, we spend time walking through our progress at the Jpmorgan Health care Conference. This month and our presentation is available online at our website intuitive dot com I'd recommend to the interested listener a review of those materials for greater insight into our progress summer.
Summarizing briefly here, we're making good progress in advancing many elements of our ecosystem, including our advanced instruments deepening our imaging and informatics programs, including our augmented reality program Iris and extending the launches of our new platforms.
We grew the install base and procedures for a single Port platform da Vinci SP. We're.
We're focused on advancing clinical indications for SP in several regions as well as extending its instrument and accessory portfolio.
For our flexible robotics platform, Ireland, we saw a strong clinical results and demand in the year, but met manufacturing and supply performance challenges in the fourth quarter as catheter demand outpaced our forecasting models and the need for important quality improvement implementations and Covid quarantines hampered our production.
We are currently shipping eye on product and expect to meet the demand curve in the first half of 2021.
Before Marshall takes you through our finances of detail I'd like to touch on our financial strategy.
Our operating model, which stood the strains of 2020 well.
Starting with our decision several years ago to shift of greater flexibility in system placement models. The incorporation of sales leasing and risk shared models allowed us to meet customers' needs during the disruptive time.
Our investments in advanced instruments, including Stapling and energy have been fruitful with growing revenues, improving margins and growing customer appreciation for advanced instruments.
We've been investing capital in our manufacturing methods to increase quality and lower our costs, which in turn has allowed us to extend the savings to our customers to law to allow them greater flexibility in deploying our products and more cost sensitive environments.
This is triggered the virtuous cycle that allows us greater volume, which in turn gives us greater ability to invest in higher volume processes.
We will continue to invest in the cycle going forward.
We believe we are still on the early innings of of long opportunity to substantially improve the quadruple aim and acute medical interventions using robotics computing advanced imaging and informatics as.
As a result, we continue to invest in our innovation engine to create and pursue these opportunities.
In closing our priorities for 2021 are as follows first will support our customers' recovery of surgery during and post pandemic.
<unk> will focus on outstanding regional performance.
Third we will advance our priority programs and launches SP ion and imaging and analytics, including new indications and finally continued expansion of clinical economic and analytical evidence base for key procedures and countries.
I'll now turn the call over to Marshall, who will take you through financial matters in greater detail.
Good afternoon, I'll describe the highlights of our performance on a non-GAAP of pro forma basis I will also summarize our GAAP performance later in my prepared remarks, a reconciliation between our pro forma and GAAP results is posted on our website.
Revenue in procedures are consistent with our preliminary press release of January 13th.
Key business metrics for the fourth quarter were as follows fourth quarter 2020 procedures increased approximately 6% compared with the fourth quarter of 2019 and increased approximately 10% compared with last quarter.
The fourth quarter system placements of 326 systems decreased 3% compared with 336 systems last year and increased 67% compared with 195 systems last quarter.
We expanded our installed base of da Vinci systems over last year by 7% to approximately 5989 systems the.
This growth rate compares with 8% in the last quarter and 12% last year.
Utilization of clinical systems in the field measured by procedures per system declined approximately 2% compared with last year and increased 8% compared with last quarter.
The impact of Covid on da Vinci procedures varied by region we.
The resurgence of Covid in parts of Europe had significant impacts on procedures, including in Italy, U K Nordics and France.
The impact of Covid on procedures in the Asia Pacific region, including China, Japan, and Korea was far less significant.
In the U S fourth quarter procedure growth was impacted by the Covid resurgence, resulting in 5% year over year growth compared to 7% growth in the third quarter.
On the resurgence in the U S and Europe was more acute and had a greater impact on procedures late in the quarter of trend the continued into January.
The impact of a resurgence can be significant for example in California, the fourth quarter Covid resurgence turned a year over year da Vinci procedure growth in October of 8% to of year over year decline of 6% in December.
We also believe that reduce diagnosis, reflecting patient concerns over COVID-19 exposure has impacted certain procedures globally. This.
This has had its most pronounced effect on prostatectomy.
Despite the fact that hospitals are better equipped to handle COVID-19 patients today compared to the outset of the pandemic COVID-19 resurgence is like those currently being experienced in parts of Europe and the U S have challenged hospital care capabilities and have negatively impacted da Vinci procedures.
In addition delays in diagnosis and treatment of underlying conditions will also continue to negatively impact da Vinci procedures.
Uncertainties in this COVID-19 environment are not predictable and the vaccine rollout and its impact on controlling COVID-19 spread is also not predictable.
Given these uncertainties, we are not providing procedure guidance at this time.
Philip will provide additional procedure commentary later in this call.
The fourth quarter capital placements exceeded our expectations, reflecting several factors in certain cases hospitals exhausted 2020 budgets and spend capacities.
And in some cases hospitals purchase systems in preparation for post pandemic environment.
We also experienced a higher level of trade ins of Si systems for fourth generation systems, reflecting hospital desires to standardize our fleet and to avail of themselves to fourth generation technology, the lower cost extended use instruments.
Looking forward, we see the following capital revenue headwinds utilization.
Utilization declined 2% year over year, resulting in excess system capacity at hospitals, we expect customers to fill existing system capacity before purchasing additional capital.
Some of the fourth quarter capital placements reflected hospitals exhausting 2020 budgets.
As the budgets reset for 2021 hospitals could reduce their capital spend, particularly as Covid Strange hospital profitability.
We expect leasing to continue to increase as a percentage of overall placements.
Macroeconomic conditions created by Covid could also impact hospital capital spending.
And as we face competition in various markets, we may experience longer selling cycle as the price pressures.
Additional revenue statistics and trends are as follows.
Total fourth quarter revenue was $1 $329 million, representing a 4% increase from last year and of 23% increase from last quarter.
Fourth quarter revenue benefited from U S customers stocking of extended use instruments and higher than expected system placements.
Leasing represented 37% of current quarter placements compared with 35% last quarter.
The fourth quarter placements included some larger IDM transactions, where the IGN prefers purchase transactions.
Excluding those transactions leasing as a percentage of total placements would of been several percentage points higher.
In an environment of COVID-19, as economic pressures increase we anticipate more customers will seek leasing or alternative financing arrangements than reflected in historical run rates.
Approximately half of the systems placed in the fourth quarter involved trade ins, which is higher than the 40% last quarter and higher than the average over the last couple of years.
Trading activity can fluctuate and be difficult to predict.
Fourth quarter average selling prices declined to 143 million from $1 six 1 million last year and 155 million in the third quarter.
The decrease relative to last year reflects a lower mix of systems placed in China, and Japan, and a higher proportion of trade transactions.
The decrease relative to last quarter reflects a higher proportion of trade in transactions.
On a higher mix of indirect market placements.
We recognized 14 million of lease buyout revenue in the fourth quarter, compared with $17 million last quarter and $34 million last year.
Lease buyout revenue has very significantly quarter to quarter and will likely continue to do so.
Instrument and accessory revenue per procedure increased to approximately $2060 per procedure compared with $1910 per procedure and the third quarter of 2020 and $1980 realized in the fourth quarter of last year.
The entirety of the increase compared to the third quarter reflects U S hospitals stocking extended use instruments.
We launched extended use of instruments early in the quarter in the U S and mid quarter in Europe.
We will launch extended use instruments in other markets in 2021, and 2022, depending on the regulatory requirements.
Going forward, we expect customers to adjust their instrument buying patterns and reduced their inventory levels to reflect the additional usage per instrument. In addition extended use instruments and lower instrument pricing will result in lower <unk> revenue per procedure to intuitive.
The impact and timing of customer buying patterns and lower per use revenue will likely begin to impact revenues in the first quarter, but will depend on customer inventory practices in procedure volumes.
While we expect price elasticity associated with extended use of instruments to enable greater penetration into available markets that benefit will be delayed by COVID-19 and otherwise will take time.
12 of the systems placed in the fourth quarter were SP systems, reflecting continued measured rollout of SP and the impact of COVID-19.
Our installed base of SP systems is now 69, eight in Korea, and <unk> 61 in the U S. Our rollout of the SP surgical system will continue to be merger measured putting systems in the hands of experienced da Vinci users, while we pursue additional indications and optimize training pathways in our supply chain.
We expect to initiate the first cases associated with a U S colorectal.
Colorectal clinical trial this quarter.
We placed four ion systems in the quarter, beginning, bringing the installed base to 36 systems.
Ion system placements and procedures are excluded from our overall system and procedure counts.
I am system placements were affected by supply chain issues described by Gary earlier in the call.
We expect to remediate the supply issues in the first half of 2021.
Our rollout of eye on we will continue to be measured while we optimize training pathways in our supply chain.
Procedures under the precise study are expected to complete in the second quarter of 2021.
Outside the U S. We placed 130 systems in the fourth quarter compared with 140 in the fourth quarter of 2019, and 79 systems last quarter.
Current quarter system placements included 54 into Europe, 22 into Japan, and 13 in the China.
Compared with 54 into Europe, 26 into Japan, and 39 into China in the fourth quarter of 2019.
System placements into China in the fourth quarter of 2019 were higher as hospitals accelerated tenders in anticipation of the possibility of higher tariffs.
Moving on the gross margin and operating expenses pro forma gross margin for the fourth quarter of 2020 was 69, 7% compared with 72, 2% for the fourth quarter of 2019.
72% last quarter.
The fourth quarter of 2020 included higher period costs associated with lower production and higher excess and obsolete inventory charges.
The decrease relative to the fourth quarter of 2019 reflects higher period costs associated with lower production higher excess and obsolete inventory charges and lower system Asps.
As revenues are pressured by COVID-19 production levels may operated below normal levels, which may result, in higher labor costs and under absorbed overhead and reduced product margins in.
In addition product and customer mix fluctuate quarter to quarter and could cause fluctuations in gross margins.
Pro forma operating expenses decreased 6% compared with the fourth quarter of 2019.
And increased 11% compared with the third quarter of 2020.
The fourth quarter of 2020 includes a $25 million contribution to the intuitive foundation compared with the 5 million contribution in the fourth quarter of 2019 and no contribution last quarter.
Fourth quarter operating expenses continued to reflect reduced spending on activities directly impacted by COVID-19, including marketing events travel and in person training as well as lower variable compensation.
These costs will naturally increase as the impact of Covid declines.
We continue to believe we have a unique opportunity to expand the benefits of compute computer aided surgery and acute interventions around the world and we'll continue to invest in the business for the long term.
During this period of Covid, we continue to invest in product development activities, including informatics.
Advanced imaging advanced instruments, and our ion and SP platforms.
Accordingly, you should expect the growth rate of R&D expenses in 'twenty and 'twenty, one to significantly exceed the 2020 growth rate.
We expect the growth rate of SG&A expenses to also increased significantly.
In 2021 compared to 2020.
SG&A spending can be categorized as follows.
Investments in O U S markets will increase over 2020 spend as we expand our capabilities and investment in clinical data.
Variable compensation will increase over 2020, as we reset goals and targets.
Of course spending on resources and infrastructure will increase over 2020 to prepare for a post COVID-19 environment.
Spend on activities impacted by Covid like travel marketing events and in person training will increase as the impact of Covid decline.
Yes.
Our pro forma effective tax rate for the fourth quarter was 27% compared with our expectations of $20 to 21%, primarily reflecting the geographic mix of income.
Our actual tax rate will fluctuate with changes in the geographic mix of income changes in taxation made by local authorities and with the impact of onetime items.
Our fourth quarter 2020 pro forma net income was $436 million or $3 58 per share compared with $426 million or $3 48 per share for the fourth quarter of 2019, and $341 million or $2 77 per share for last quarter.
I will now summarize our GAAP results.
GAAP net income was 364 million of $3 <unk> per share for the fourth quarter of 2020, compared with GAAP net income of $363 million or $2 99 per share for the fourth quarter of 2019, and GAAP net income of 317 million of $2 60 per share for last.
<unk>.
The adjustments between pro forma and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee stock Awards.
Employee stock based compensation and IP charges amortization of intangibles and acquisition related items and legal settlements.
GAAP net income for the fourth quarter and third quarters of 2020 also included pretax gains of $4 7 million and $61 7 million on our investments in private entities, resulting from our purchases of certain technologies the.
The EPS impact of these gains net of tax was <unk> <unk> per share in the fourth quarter and 39 per share in the third quarter.
These gains are excluded from our pro forma results.
We ended the quarter with cash and investments of $6 9 billion compared with $6 4 billion at September 32020, and $5 8 billion at December 31 2019.
The increase in cash in the fourth quarter reflected cash from operations a reduction in inventory and overall working capital and.
And stock exercises.
We repurchased $34 million of shares in the quarter with an average price of <unk> at an average price of $661 10 per share.
And with that I'd like to turn it over to Filip, who will go over our procedure performance.
Thank you Marshall.
Our overall fourth quarter procedure growth was 6% compared to 19% growth during the fourth the fourth quarter of 2019, and 7% growth last quarter. Our Q4 procedure growth was driven by 5% growth in the U S and 11% growth O U S resurgence of Covid in the U S on Europe impacted our growth rates in the quarter and we saw procedure growth rates decline as the core.
The progress, particularly late in the quarter.
With respect to key contributors to growth overall procedures in China, and bariatrics and the U S were the largest drivers of procedure growth in Q4.
In the U S within general surgery Bariatrics coli in hernia were the largest contributors to procedure growth within the quarter.
<unk> may be benefiting from certain patients prioritizing weight loss as of the obesity is the significant COVID-19 risk factor. In addition, we continue to receive positive reviews of our short form 60, stapler, which provides surgeons and optimize robotic toolset and feedback for bariatric procedures.
And China procedure growth accelerated as new systems installed under the quota began to provide additional capacity for incremental growth.
Q4, China procedures had broad based growth in urology thoracic general surgery and Gyn oncology.
With respect to our more mature procedure categories in the U S Q4, gynecology procedure growth was up reflecting growth in cancer procedures, partially offset by declines in benign procedures.
On a worldwide basis Pvp procedures in the fourth quarter of declines year over year and had similar trends as we described last quarter.
Covid is impacting the diagnostic and patient pipeline related to the DPP.
Now turning to the clinical side of our business.
Each quarter on these calls we highlight certain recently published studies that we deem to be notable however to gain of more complete understanding of the body of evidence we encourage all stakeholders to thoroughly review the extensive detail of scientific studies that have been published over the years.
Dr. Clark, a Wilson and Jihad Coke from the Cleveland Clinic and colleagues in the paper published in neurology describe their experience evaluating robotic assisted radical prostatectomy with da Vinci SP through an ex extra peritoneal approach an enhanced recovery protocol for same day surgery.
60 subjects with Oregon confined disease underwent an SP procedure with no patients requiring conversion to another approach.
Median length of stay for all patients was $4 two hours.
75% of all patients enrolled were discharged on the day of surgery, and <unk> 96 per cent of patients discharged within 24 hours when excluding those either with surgery after six pm, but with preplanned admissions due to patient preference or a significant comorbidities.
The authors concluded of robotic assisted radical prostatectomy with the da Vinci SP system and extra peritoneal approach can be performed safely and reproducibility as the same day surgery.
This publication add to the number of early studies around the emerging SP technology, demonstrating encouraging results within robotic assisted radical prostatectomy as the same day surgery and acceptable Peri operative functional and short term oncological outcomes in the hands of experienced surgeons for the appropriate patients.
We look forward to the growth of the body of evidence around da Vinci SP.
Lastly, we would like to highlight that our second annual sustainability report will be available after the call on our Investor Relations website that concludes our prepared comments, we will now open the call to your questions.
Okay.
Ladies and gentlemen, if you'd like to place yourself in queue for a question. Please press the one followed by the zero now.
You are using a speaker phone it may be helpful to lift the handset before pressing those number of keys, but once again. Please press one followed by zero for question immediately.
First to go to the line of the <unk> with Goldman Sachs. Your line is open.
Thanks, very much hey, good afternoon, everyone.
I would first go to your comments in general on hospital capital spending and maybe try to reconcile some of them on anything if you go back to last week, you cited hospitals with seven plus systems, where were up strongly in and here you're still citing lower utilization is the key headwind.
And so I'm just wondering are you otherwise seeing of skewing towards newer customers and just trying to get my hands around I have to imagine it's complicated and hospital systems are different but how much more color you can provide around kind of some of these different.
The data points that you've provided.
Yes, I think I'll just go ahead.
Why don't I jump in Marshall and then I'll kick it back to you Amit Thanks for the question.
We were talking about earlier in the month here.
We think theres some budget flushing that happened at the end of 2020.
How strong that will be into 2021 did they pull forward spending that would otherwise normally have been in 'twenty, one hard to say.
Having said that if you look at where we were winning relative to other priorities. Even if there is some budget pull forward.
The large customers were.
<unk> already had robotics programs were expressing confidence with us.
We think is a positive the <unk>.
Caution, we're sending you know in the in this in this call is just that over time, there will be an equilibration, which is there is some excess capacity in the field because of COVID-19 of suppressing procedures.
And at some point.
The Covid will will lift and that capacity will be absorbed.
Some folks will invest ahead, getting ready and being able to work on backlog and others will be conservative and wait till they consume that capacity forecasting that is hard and so that's how we're trying to help you navigate through this but Marshall please.
The clean up anything that you need two of that answer Nope, you you hit it perfectly.
Okay and ask my follow up and then separate on the data and digital engagements to date again kind of going off of the comment you made last week at Hospira on analytics and he talked about the 350 hospital of 690 690 engagements and just wondering how much more color you can give us on that in terms of.
How much of that is that programmatic variety that you talked about that won't necessarily be monetize versus something that could either improve outcomes reduce costs and potentially be monetize just any color around those early engagements would be helpful. Thank you.
Yeah. Thanks for the question.
When we're talking about what we shared with you in the talk of J P.
P. Morgan most of that is programming on programmatic.
I'll also say, it's not so much something that we think.
Is going to be revenue generating directly we think that it illuminates the value of our ecosystem and strong da Vinci programs.
And that is a benefit to us it increases the stick rate on <unk>.
Those people to see.
On a verifiable way within their own datasets the value they are bringing the gives them the action plans.
To find opportunity for standardization and on.
Other kinds of efficiency improvements so it's.
It's sort of high value of the customer and high value to us.
Some of the other things that we've shared with you for example of Iris.
Those things are something that we will collect revenue for the they probably won't become huge revenue arms in and of themselves, but they bring value on a per case basis, and it's something that we can talk to the customer about in terms of value creation. There. They also strength in the ecosystem. So I think for our shareholders were asking the.
<unk>, Hey, one is <unk>.
Informatics and the.
<unk> learning create of revenue arm of its own I'm not sure. That's the right question I think the analytics and informatics power of the ecosystem as a whole.
We're pretty agnostic as to how we get paid for that if we get paid for that through increased utilization wonderful that works great. We look at the cost to develop those programs in and kind of overall their contribution to our financial health, but.
But we don't have the charge for them individually, if that's not how the customer wants to pay for it let me turn it to you Marshall in any any color you want to add.
No I think that's right I think that when we look at it as the opportunity to increase the ecosystem and to expand our base into our accelerated adoption.
Yeah.
Thanks, Amit.
Next to each of the line of David Lewis of Morgan Stanley. Your line is open.
Great. Thanks, so much for taking the question Marcia I. Appreciate we don't have guidance on I. Appreciate your commentary on the spending levels for 'twenty, one, but as I'm sure. You appreciate without without revenue figures those are kind of hard numbers to put in context. So I was wondering if you help us out a little bit more I mean is the is the right messaging here that opex growth in 'twenty, one you just kind of grow faster than whatever.
The sales growth rate is on.
Or asked is kind of the same question different way I mean SG&A for the last several years has grown in line with revenue in R&D and the grown you know kind of two ex revenue growth rates are those the type of any of those parameters you would kind of give us a.
Any visibility into the Super helpful. And then I got a couple of follow ups.
It's a good question and I am empathetic to the fact that.
Arent, giving you our revenue guidance and so it's hard to hard to put those numbers in context. However, it really does come down to the the impacts of Covid are really pretty unpredictable and so.
If COVID-19 Wayne's quickly then I think you know the spending the spend we're talking about.
That's up better with our revenue increase but I got to tell you.
The point of my of my.
The reason I pointed this all out in terms of the increases in expenses that we were able to this year we saw.
A long period, where COVID-19 impacted us and we some of the variable expenses I outlined.
Came in pretty low relative to what the historically had been in those those will increase as Covid goes away, but in addition to that.
There are other expenses that we will continue to two of them.
On to spend the increases there will be increases regardless of what happens to Covid I think we want to continue to invest in the R&D areas that I mentioned and we want to because we see that theres, a real opportunity to continue to expand our marketplace and to and to expand.
Expand penetration in the long term.
So.
Where we're going to increase those costs I know I haven't given you, which youre looking for but it's.
Just a very difficult environment to predict revenue and procedures at this point.
Okay, and then just maybe two.
Two quick follow ups, one easier to answer the other just in terms of.
Volumes obviously.
Fourth quarter was more similar to third quarter and generally speaking on the message for most of corporates last week was that first quarter is going to be you at fourth quarter, if not frankly, a little worse I'm. Just wondering if you sort of comment on sort of what youre seeing for the procedure of environment here in the first quarter and then just secondarily on a kind of juice program.
Obviously, we saw kind of a bolus on revenue per procedure of this particular quarter as hospitals didn't change inventory patterns.
Are you seeing any evidence I know, it's hard on Covid that it's driving higher demand and the extent of use program driving higher demand and when would you expect this revenue per procedure numbers to begin to reverse as that as early as the first quarter or probably more likely middle part of the year sorry for both questions. Thanks, So much.
Yes.
Yes.
Sure.
The first part of your question was Q1 volume up there next to chew on volume.
I made the comment that the <unk>.
As we went through the quarter the resurgence of became more acute and it had a greater impact on procedures and so I gave you. The California example of where you go from growth in October to reduction in December.
That should be an indication of of the the level of sort of impact it can have.
I made the I also made the comment that we saw the trends at the end of the quarter continue into January. So I think you said that the other companies are saying the Q1 could be worse it could be.
Again, we're not we're not going to try to predict exactly where it's going to come out given the uncertainties around it but it's clear coming into the quarter. It was at the at the.
The bottom end of what was going on in Q4.
As far as extended use instruments go.
We launched it in the U S and at the beginning of the quarter.
And in Europe in the middle of the quarter about three quarters of our customers are now acquiring extended use instruments.
They're starting to be used on on on procedures.
It's really hard for us to predict.
Yeah, exactly when we will start to see.
The benefits of those extended use instruments in terms of elasticity.
And the price elasticity and <unk>.
Certainly youre going to be confounded by by by Covid. So.
I think it will take time I think it's going to take a while before we start to see that.
Sometimes you have to point out the benefits to the hospital units to sell of a little bit and just think.
We'll be patient about it.
Yes.
Yes.
Next we have the line of Bob Hopkins of Bank of America. Your line is open.
Oh, great Thanks, and good afternoon.
Gary I wanted to get your opinion on on two geographies if okay first on the on the U S.
Just curious do you think that.
Perhaps by the second half of this year, there's a chance based on everything youre seeing the we could be.
Most two of normal level of surgical procedure volumes in the U S or given what you're seeing on the diagnostic side and the slow vaccine rollout that that's more likely to be of 'twenty 'twenty. Two event and then I'd also love to get your opinion on China and the durability of the phenomenal growth you appear to be having here of late.
Okay.
Hey, Bob on the first one on the U S.
Won't predict for you, but let's talk about the the puts and takes the things that are going to be the push pull about it.
Clearly the hospitals want to get back to treating patients who are non COVID-19 patients, there's a demand and the desire to do that.
It takes a couple of things one is that.
Resources get freed up from treating COVID-19 patients to allow them to treat other things and some of that is ICU resources and a lot of it is staff. So as Covid surges go. So it has access to that set of resources.
You're tracking and analysis is as good as ours in terms of looking at how well the vaccine is going to go out and what the COVID-19 numbers might be so I think thats.
A large part of it in terms of the diagnostic pipelines.
The kind of the same thing I think.
Everybody wants to get patients back in to get diagnosed.
We think of backlog that's been building for surgical patients as the surge happens and then you have this longer backlog of folks who have been foregoing.
Normal.
Checkups, whether its colonoscopy or PSA screening or what have you that will start coming back in and of course disease doesn't take a holiday and as a result of those things will be more advanced when they're caught we've seen this before we've been in this movie.
When we saw changes to the PSA testing recommendations.
That will again create of backlog, but it'll take longer for it to realize and of longer for it to process through.
I don't think its going to drive substantive share shifts between treatment modalities I think.
It's going to be hard on patients as.
They go through that.
That will provide a headwind for us and certainly in 2021, and then tailwind thereafter as those folks are diagnosed and come back into the pipe.
So that's kind of where I see the U S.
Moving to China.
But long term, we're quite excited pretty clearly.
Chinese patients are interested in high quality care Chinese surgeons are quite interested in robotics and in da Vinci.
And our partnership with flow soon and the joint venture is going well for us.
So in the near term that feels great and I think theres a lot of strong underlying interest.
As we've talked about before of the medical marketplace in China is complicated right.
Right now systems are under quota centrally managed quota.
We see changes occurring in the Chinese regulatory environment over time as is the FTA implements new policies and processes and.
And we see that there are Chinese companies that are interested in this opportunity of pushing hard to to field competitive systems. So we are committed long term to China, I think it's going to be a strong demand market and a balance of <unk>.
Sometimes turbulent marketplace due to policy changes and some of the central controls that are in place.
We'll keep you updated as we as we get more clarity there.
Great. Thank you I'll leave it at that.
Bob.
Next we have line of Larry <unk> Wells Fargo. Your line is open.
Good afternoon, and thanks for taking the question.
I'll just ask one multipart question on ion I'm, just curious to know kind of the what comes next year you talked about the precise data completing enrollment, particularly in the second quarter should we assume that we see that data in 2022 is there any update on on ion in China.
And then you know your competition has talked about indication expansion beyond lung bronchoscopy.
Any any color or are you willing to share there and then just lastly, adding of therapeutic.
Capability to eye on so basically the roadmap here on eye on you know what can we expect maybe.
Going forward here. Thanks for taking the question alright, Thanks, Larry Philip I'm going to turn to you on the precise trial timing and then I'll take it from there.
Yes.
With respect to when you might hear some data. It is a fair assumption to expect to hear something in 2022, we haven't been more specific beyond that Larry.
Yeah.
With regard to.
The future indications right now where we're at with eye on we are our commercial teams on our manufacturing operations teams or type of focused on supplying and performing in the <unk>.
Diagnostic bronchoscopy market, our first indication clearly ion as the platform technology and we're excited about it.
That said I'd remind everybody we are in early innings all of us the entire field as an early innings with regard to a bronchoscopy. Our clinical results. There are outstanding I think that they are market, leading relative to competitors any of the competitors and we want to fulfill that market, we want to satisfy those customers that means satisfying them in <unk>.
Of quality in demand and shipments and so on.
We think there are longer term applications.
Beyond <unk>.
Bronchoscopy and beyond diagnostics and we're working on those we are working on.
Ablation technologies and some other things.
We're not ready to speak publicly about where we might go next.
For a couple of reasons one is.
We're still on the very earliest innings about making a bronchoscopy of reality and two for competitive reasons, we're not ready yet to describe what we intend to do next.
It's been China Gary.
On the China front.
We of course have the the joint venture with both of whom we.
We are working through pathways for iron in China, We think there's a market there I would.
The advice folks that the the Chinese regulatory system in C. F. D. A handles gen one products pretty differently than FDA does in the U S and as a result of you want to see a little greater maturity on your product line before you go broadly there. So we're working through that with our JV and also with.
The Chinese regulators when we have some timelines for you we will describe them, but we remain active and interested.
Thanks, so much.
Next we have the line of Tycho Peterson Jpmorgan. Your line is open.
Hey, Thanks, Gary you mentioned no kind of shift in treatment modalities. So I assume the deceleration doesn't imply any kind of share loss to laparoscopic, but as we think about coming out of the pandemic. The other side of it as you highlighted the remote technology for monitoring clustering and the analysis are there structural changes here, you think coming out of the pandemic net draw.
<unk> faster adoption of robotics.
I believe so now this is the.
The right answer is we'll see time will tell but there are some encouraging anecdotes in the or anecdotes.
One is.
I think folks are realizing that a lot can get done without jumping on planes and thats true for surgeons and one of the things that our teams have done beautifully this year is to.
More fully digitize and regionalized training.
That has been great. So forward deployment of training and greater use of digital tools that will continue and I think the acceptance of that is increasing its also accelerated remote product offering as you said, so I think that that has been a positive for us and something that we had.
Thankfully, we've made some investments in prior to the pandemic. The second part is I think the people are seeing.
Changes in resource consumption of days in the hospital ICU time.
Patient comfort of being housed in hospitals.
Independent Bank has declined and I think.
That will be durable I think even after COVID-19 rates start to draw I think folks thinking that sitting around the hospital is in a great idea and using ICU resources. When you don't have two isn't a great idea.
Already I think we see that folks are saying Hey, <unk>.
A really high quality of minimally invasive surgery done well by the way, having the analytics to back that up is going to be.
Appreciated and maybe an accelerant, so I am cautiously optimistic that some of the the trends we're seeing in terms of what recovery might be are going to be real positive for intuitive.
Another thing you highlighted at the conference was the regulatory requirements and timelines for the industry keep keep increasing I know that's something you've been talking about for a while but as we think about the roadmap here for SPD IDT IV trial for colorectal.
And of the timelines gotten pushed out further in your view given the regulatory burden or is just kind of in line with what you've been talking about for a while.
I think we're starting to see the contours of the regulation side in the U S stabilized so it's stabilizing at the requirement level that's.
Greater than it was in years past, but I don't think it's continuously moving that's been good I think the thing that's challenged some timelines for us and others is is COVID-19, if you're a clinical trial sites are are having to manage COVID-19 as well as whatever you were clinical trial is that can put pressure on you.
That's kind of of near term thing.
Longer term the question of what does this do if the clinical trial requirements and general data requirements in the U S and Europe.
On a computer rated systems and robotics have become greater what does that imply and it probably implies a couple of things one is that mark systems in the market are likely to stay on the market a little longer because it's just extended timelines for innovation I think the other thing is that it probably re sequences when U C diff.
Current products, where in the world because of.
Some health care systems out of Korea being notable.
<unk> are allowing innovative products into their systems, a little more quickly than other ones are becoming a little less so so for a company like us Youll see increased investment in head count and resources for the clinical and regulatory staff and Youll see a reordering of where we go with new innovations over time, you'll probably.
For the industry.
The platforms sit a little longer.
Probably benefits income.
<unk> is a little more than it does in surgeons.
Great and then one last one on the extended use of rollout you did Europe recently U S last quarter is there a next step.
The process that you're going to do it in Asia and any reason the elasticity would be different in different geographies in Europe.
Marshall why don't you take that first sure.
On the rollout into other parts of the world will depend on the regulatory timelines as you could imagine in China. It will take us a long time.
Some of the other markets it might be a little bit quicker I don't have a complete roadmap of every country, but.
Yes, Asia Pac is absolutely on our mind and we'd like to get them out too.
Two our direct markets in Asia as soon as possible.
As far as the impact on elasticity.
We did two things in the United States. If you recall, we modified the.
We obviously launched extended use instruments, which lower the cost of care for hospitals, but we also of simultaneous with that lowered the price of a few select instruments that are used typically in lower benign lower acuity procedure benign lower acuity procedures like <unk>.
Cholecystectomy benign hysterectomy and inguinal Hernias and then in totality than the use.
You look at an instrument set that might be used.
The color on.
The Cholecystectomy then the cost is competitive with other minimally invasive approaches.
In each country, we have modified the pricing differently and we're targeting those procedures that are pressured by reimbursement.
So you can't kind of peanut butter spread the comment of of.
The elasticity will do in the United States will happen in the other countries.
But we are targeting specified procedures on each of those countries, where reimbursement is stressed and we believe we provide value and we will see we believe that will create some elasticity in each country.
Just very in terms of magnitude.
Okay. Thank you.
Next to Interline, Richard Milliliter of SPV Leerink. Your line is open.
Hi, Thanks for taking the questions if I could just start off on the <unk>.
<unk> of landscape, Gary any comments you could offer on the internationally any any competitors generic on the market and what youre seeing out there relative to kind of what you would've expected and then in the U S. Just in light of some updates on mainly competitor J&J recently this fall.
Provided.
An update on the feature set and any thoughts you would care to offer on where theyre going to be you know trying to trying to compete.
Particularly on the kind of extra robotic arms et cetera.
Sure.
Just on the just speaking to the international side the <unk>.
First thing I'd remind everybody is it's it's not really a robot versus robot question for customers, it's really low.
Of Robotically enabled ecosystem that drives outcomes versus the robotically enabled ecosystem the drive different outcomes that the.
That is the its programmatic versus programmatic.
In each of these when they come out and you kind of look at it and say, okay. What's the robot capable of do they have the instruments and the accessories. The imaging systems. The advanced tools that are required some of the software and analytic capabilities training capabilities, and so on and and you see of pretty different.
The skill set in the.
Capability out of each of these ecosystems.
And that is true as well for some of the bigger competitors that are domestic.
How do we think about it and I think that's how customers buy and large we will think about it though there'll always be some customers who are interested in trialing and seeing what's capable of lot of something new so I would expect that.
Nothing architecturally that I've seen.
Of any of them, including the most recent announcements has surprised me I think we've seen a lot of these ideas. We've trialed personally a lot of them in the inside the company and so I think time will tell we have made the tradeoffs. We've made for a reason based on evaluation building product and kind of scientific.
<unk>.
And I think that customers will evaluate those tradeoffs overtime.
We've also seen.
The idea that some of the bigger players want to bundle that theyre going to put all of these things together, maybe lower the price of capital and try to throw some other things and see if they can entice folks.
And I think the way I would ask <unk>.
Customers and shareholders to think about it is bundling makes sense.
The underlying products our commodities, if everybody is selling to ply toilet paper.
<unk> brand is not that different than the other it's all fine, but that's not where we are the robotic systems in the instrumentation and the imaging systems are non commoditized.
And as a result, there will be strong differences.
And how they're used and what the outcomes are and in that regard I think that's what we'll point are our customers too and our sales force to understand.
As these different things come on.
Got it and if I could just have one more follow up on the capital environment and the discussions that you're having you know as you as you talk to you.
The institution, because they think of the 2021 budgets.
I'm curious one are they kind of thinking of the two year budgeting process or is it any different than the way they've approached the budgeting.
In the past in the wake of Covid and then maybe two is the.
What signs of anything they're going to look forward to kind of get back to you.
Just to have confidence to go and make the purchase.
The uncertainty that still exists.
Marshall wanted to kick off that answer and I'll add a little on when Youre done, yes, I think the first part of your question.
What are they doing from a budget perspective.
Don't have enough insight to be able to answer the question well.
Sure.
We said that we believe that they'll go through a reset of course and for 2021.
I don't know if they'll have the same level of spending they did we believe that there is a financial pressure on the hospitals.
On a number of the hospitals as a result of Covid. So.
There is the possibility of that 2021 budgets will be less.
Yes.
We will be smaller than they were in 2020, but I don't have great insight to that.
Yes, I think the thing I would point to that I think is kind of a.
Economics question for everybody is just going to be something to look at us.
They will make their estimates as to how fast folks will return.
And whether they want to accelerate so that they have capacity available for dealing with the backlog I think that that will differ by hospital group. So some folks will have the capital capacity to lean in and see this as an opportunity to deepen their exposure of their presence in market others won't feel.
<unk> and will want to wait and see so I do not think it's going to be a one size fits all in terms of how they do their financial planning.
That was our last question so.
Ill conclude from here.
In closing we continue to believe there is a substantial and durable opportunity to fundamentally improve surgery and acute interventions on.
At the time, our teams continue to work closely with hospitals physicians and care teams in pursuit of what our customers have term of the quadruple aim.
Better more predictable patient outcomes better experiences for patients better experiences for their care teams and ultimately the lower total cost of care.
We believe value creation in surgery and acute care is foundational of human it flows.
From respect for and understanding of patients and care teams their needs and their environment.
Thank you for your support on this extraordinary journey, we look forward to talking to you again in three months.
And ladies and gentlemen that does conclude the presentation for this afternoon.
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